The Internal Revenue Service has issued Notice 2020-23 which extends the deadlines for taxpayers to invest capital gains in a 1031 exchange and qualified opportunity zone fund due to the coronavirus (COVID-19) pandemic.

Section 1031 of the Internal Revenue Code allows investors to defer paying capital gains taxes on investment property sales by reinvesting the proceeds into a similar investment property within a specified timeframe. After an investment property is sold, investors typically have 45 days to identify the replacement property and 180 days to complete a transaction.

Taxpayers now have until July 15, 2020 to identify and/or purchase a replacement property for 1031 exchanges with deadlines due on or after April 1, 2020.

Opportunity Zones

Regarding opportunity zones, the Tax Cuts and Jobs Act of 2017 established this program to stimulate economic development in distressed low-income communities by offering potentially significant tax benefits to investors that make long-term investments in these areas. Capital gains qualify for beneficial treatment under the law as long as they are invested within 180 days of the gain being realized.

Taxpayers now have until July 15, 2020 to elect to invest capital gains into a qualified opportunity fund if the original 180-day period expired on or after April 1, 2020.

Please note that this is different from the usual disaster extension that only provides for an extra 120 days.

Here are two examples to illustrate the current extension.

Example 1: Exchange began April 1, 2020. The 45th day (to identify property) is May 16, 2020, which is now extended to July 15, 2020. Taxpayer must close on replacement property by Sept 28, which is the 180th day after April 1.

Example 2: Exchange began Dec 31, 2019. The 45th day (to identify property) is Feb 14, 2020. The identification period is not extended because it is before April 1. (The 180th day to close on replacement property would have been June 28, which would have been extended to July 15, 2020.)

This remains a fluid situation and we will provide any clarification or changes that the IRS issues, if any. As always, exchangers should speak with their tax advisors to determine if they are eligible for an extension.